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What can we actually learn from the Co-op’s recent troubles?
Blog posted by: Lydia Prieg
Many may view the Co-op’s recent troubles as proof that mutuals are little better than regular commercial banks. However, it is vital that we recognise the Co-op is not actually a cooperative bank at all; it is a regular commercial bank, owned by the Co-operative Group. While this may seem like a minor, technical distinction, it has a big impact on how the bank is likely to behave.
For example, co-operative banks throughout Europe typically take the form of collaborating networks of small, locally owned and governed banks. They work together in some respects, such as gaining group access to expensive national payment systems infrastructure, in order to enjoy the financial advantages that come with scale without losing the benefits, such as strong SME lending, that come from local decision making and ownership.
Here, the Co-op has no direct local customer ownership or oversight. It’s consequently no surprise then that its managers seized the opportunity to buy Britannia and expand their empire without properly considering whether this move was actually in the interests of their customers.
In short, the Co-operative Bank has been acting like a regular commercial bank; unsurprising given that it is not actually a cooperative. Consequently, its problems do not undermine the argument that Britain is in urgent need of a more diverse banking sector, as can be found in many other countries, including Germany, France, Austria, Norway and Japan. Britain also has essentially no local or regional banks, which once again means we are a striking international anomaly, even in comparison to the US, where 34% of the banking sector is local.
While it is very encouraging to see that the Co-op’s creditors, rather than taxpayers, are picking up the bill for the bank’s troubles, this does not mean that it is mission accomplished on the ‘too-big-to-fail’ problem. The Co-op approach works very well when an individual institution is in a very specific sort of trouble. However, when many financial insitutions are suffering from similar problems, as is often the case in the middle of a banking crisis, such an approach would very likely cause widespread panic in the markets. To avoid this, governments will almost certainly play it safe, and resort once again to taxpayers shoring up the banking system. We have to acknowledge that we quite simply have banks that are too big for our economy.